Title insurance is often a requirement when purchasing a home, even though its significance may not be immediately apparent. Without it, lingering doubts about the legitimacy of the property's ownership may persist, such as, "Does the seller truly have rightful ownership?" In the absence of title insurance, potential issues involving other parties' claims to the property, like mineral, air, or utility rights, a bank's mortgage interest, or government tax liens, can be unsettling.
But what does title insurance actually do? In essence, it safeguards against past title-related events rather than future occurrences after the title has been granted. The process typically involves two key steps:
First, the title company or an attorney rigorously verifies the seller's ownership and their ability to sell the property. This comprehensive title search scrutinizes property records to identify clerical errors, undisclosed heirs, spousal claims, deed omissions, undisclosed liens, or deed fraud. Any discrepancies are rectified before finalizing the home purchase transaction.
Second, the title company enlists an underwriting company to issue a title insurance policy. This policy serves as a legal shield in case anyone contests your property title. Should you suffer any loss of equity due to such a challenge, you will receive compensation.
Homeowners often need to secure two distinct insurance policies: one protecting them as the property owner and another safeguarding the lender's interests. The lender's policy is a requirement because it provides a loan with the property as collateral, and any issues with the title can impact the value of the lender's security. The lender's policy only covers the loan amount and decreases as the homeowner repays the loan.